Since the start of the year, the Dow Jones Industrial Average has broken through 20,000, the S&P 500 has soared higher than ever and the S&P/TSX Composite Index has also reached an all-time high. That has many investors wondering where things might go from here and how to invest in a soaring market.
Many people point to Donald Trump and his seemingly pro-growth policies – mainly infrastructure spending and tax cuts – as to why the market has continued to climb this year. But the rally has been going on for far longer, says Steve Rogers, Investment Strategist with Investors Group Investment Management. “The recovery from the 2008 global financial crisis has been steady,” he says. “Certainly, there have been ups and downs but when certain sectors were down others picked up the slack.”
There are many reasons as to why the market has continued to rise over the last several years including low interest rates making stocks more attractive than low-yielding bonds and companies buying back their own stock. More recently, the gains have been driven by improved company earnings growth, which is usually the best reason for market gains.
“After five negative quarters, earnings have been growing again since mid-2016 and will likely continue to grow,” says Rogers. “And, at the end of the day, for investors, it’s all about earnings. You’re buying stocks to buy your claim on earnings.”
Despite the strong gains this year, and in years past, the market doesn’t show signs of slowing and is likely to continue to grow for an extended period, says Rogers. The economy is doing well, and as earnings grow, stocks rise. “Barring political risks, I believe this uptrend will be around for two or more years at least,” he says.
While every investor likes rising markets, those who haven’t paid much attention to their portfolios could suddenly find themselves in far more stocks than they had originally wanted. Say you have 50% of your money in stocks and 50% in bonds. As equities rise, that asset mix will start to shift – you could end up having 70% of your dollars in stock and 30% in bonds.
Just look at how the S&P 500 has shifted since 2008. In 2008, the S&P 500’s energy sector made up 13.3% of the index. As of last December it accounted for 7.6%. Over that same period, the technology sector grew from 15% to 20%, and the consumer discretionary sector went from 8.4% to 12%. “With shifts like these, your portfolio definitely warrants a review,” says Rogers.
When markets climb like they have, it’s easy for investors to see dollar signs. However, the market could turn at a moment’s notice. That’s why better to continually rebalance to your desired asset mix than to jump into stocks just because the market is going up. If the market falls and you’re too heavily weighted to equities, you could lose more money than you’d like.
The bottom line on investing in equities is this: Don’t let shorter market cycles influence your investing decisions. Long-term investing and diversification are keys to a prudent investment strategy that reduces volatility but not returns.